Key Economic Reports This Week May Influence Future Fed Rate Policy

Investors are closely watching two significant economic reports this week that could shape the trajectory of the Federal Reserve’s rate policy and impact market reactions. The first report, the Commerce Department’s initial gross domestic product (GDP) estimate for the fourth quarter of 2023, is expected to reveal a 1.7% growth, marking the slowest pace since the Q2 2022 decline. Following this, the Commerce Department will release the December reading on the personal consumption expenditures (PCE) price index, a crucial inflation gauge for the Fed.

Economists anticipate a 0.2% growth in core PCE prices for December and a 3% increase for the full year. Both data points, especially the inflation figures, will be closely scrutinized as they play a crucial role in determining the Fed’s future rate path. Chicago Fed President Austan Goolsbee highlighted the importance of clear evidence indicating a path toward achieving the 2% inflation target for adjusting the restrictive stance.

Market sentiment regarding potential rate cuts has shifted, with fed funds futures indicating minimal chances of a rate cut during the Jan 30-31 meeting. The odds for a reduction at the March meeting declined from 81% to 47.2% within a week. Additionally, traders revised down the expected number of rate cuts from six to five quarter percentage point decreases.

This shift in sentiment followed stronger-than-expected consumer spending growth of 0.6% in December and a drop in initial jobless claims to their lowest level since September 2022. Comments from several Fed officials, including Governor Christopher Waller, New York Fed President John Williams, and Atlanta Fed President Raphael Bostic, also suggested a cautious approach towards rate cuts.

Housing inflation remains a focal point, with shelter inflation rising 6.2% year-on-year in the December consumer price index report. However, the New Tenant Rent Index, a new Labor Department reading, indicated a lower path for housing inflation, showing a 4.6% decline in the fourth quarter of 2023 from a year ago.

While short-term inflation data may align with the Fed’s dovish plans, Citigroup economist Andrew Hollenhorst expects inflation to persist, possibly delaying the first rate cut until at least June.

The timing and extent of rate cuts are crucial for market outcomes, with various factors influencing the outlook. Continued stock market rallies, geopolitical tensions, and stronger-than-expected economic growth could impact expectations for monetary policy. The potential for inflation to rise might lead the Fed to consider raising the Federal Funds rate instead of cutting it, adding an intriguing element to the ongoing discussions about future rate moves.

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